The Gristle

A Matter of Equity

Wednesday, August 24, 2016

A Matter of Equity: In the fierce cyclonic thunderstorm of a heated petroleum industry, there is perhaps an eye of calm and equilibrium.

Whatcom County was scheduled to appear in Olympia this week to defend against what might’ve been the largest property tax reassessment in county history, a proposed 50 percent devaluation of arguably the most important asset to the county’s property tax portfolio. Instead, the county settled last week with the BP Oil Refinery at Cherry Point, avoiding an appearance before the Washington State Board of Tax Appeals.

The settlement agreement reduces the assessed valuation of the refinery’s property and assets at Cherry Point by about 18 percent; but immediately frees up about $4.8 million in property taxes that have been held as valuation-in-controversy, according to Whatcom County Assessor Keith Willnauer. In addition, the agreement may also free up receipts held in controversy by ConocoPhillips. Concoco had withheld these payments in protest pending BP’s resolution with the county. Now that BP has settled, perhaps Conoco will, too.

“We were coming down to the wire,” Willnauer admitted, “but we were fully prepared for arguments, ready to make our case.

“When there is a threshold of highly disputed value, there is a statute that requires that we hold what is in dispute from valuation-in-controversy out from ordinary collections,” he said. “And in this case we have been holding a disputed $700 million in valuation for more than two years. The taxes have been being duly collected, while another $300-to-$400 million has been valuation-in-controversy, and has been held out of collections.”

The BP and Conoco refineries at Cherry Point are the number one and number two contributors to property tax receipts in Whatcom County, BP at nearly twice the contribution of Conoco. The amount paid into county taxing districts varies by kind—the refineries contribute about 3 percent to the county’s overall tax base; for the Blaine School District, the contribution is about 22 percent of the tax base; for Fire District 7, it’s a third—33 percent of property tax revenues collected for the district, according to the Assessor’s office. BP paid about $10 million per year into these local taxing districts. Now, as a result of the settlement, BP will pay about $1.2 million per year less in property tax.

The settlement has little to do with county policy discussions currently underway regarding the future of fuels export at Cherry Point, except perhaps in two aspects: First, the broadly understood importance of such industries to the health of the county’s tax base. Second, an indicator of just how much in flux the energy business is in the United States: Refineries have operated at Cherry Point under varying ownerships for half a century without a whimper about the taxes they pay.

What this means in the short term is homeowners will see a slight reduction in their tax rates as the county gains access to taxes held in protest by the refineries and is able to backfill about three years of revenue from disputed valuation. In out years, it means the refineries will contribute a little bit less to the health and prosperity of Whatcom County, and that means homeowners must contribute more to maintain current levels of service.

“When you’ve already levied to a certain amount and are faced with potentially a large refund, that can affect the year’s tax rolls from property tax. Levy rates can go up considerably to fill that hole,” Willnauer explained. “Property tax statutes allow you to recover that refund in a subsequent year; however, if districts don’t have that kind of reserves, then those tax rolls are affected.

“The result,” he summed up, “is that we have stipulated to a value than was less than what we had on the books originally, but considerably more than the amount that was being held in controversy.

“We now have an opportunity to recover what had already been pushed on to other taxpayers.”

The dust-up began in 2013, when BP announced the sale of its Carson, Calif., refinery and related logistics and marketing assets in the region to Tesoro Corporation for approximately $2.4 billion as part of a plan to reshape BP’s fuels business. Cash proceeds from the sale included approximately $1.075 billion for assets and an estimated $1.35 billion primarily for inventory at market value and other working capital.

The sale was perhaps not the windfall BP desired in a volatile energy market, but the sale did set the floor for what a refinery might be worth, triggering an attempt by the energy giant to claim the valuation of its Cherry Point refinery assets should be sliced by more than 50 percent. There are problems with BP Corporate’s reasoning—namely that the Cherry Point refinery had recently received significant upgrades as part of the company’s shift in operations and the opening of international markets for export fuels. Indeed, they’d dumped the aging Carson facility precisely for the cash flow and nimbleness they’d require for that transition. Now BP was trying to argue that what they’d dumped in a fire sale in California set the price for the value of what they’d improved in the hottest section of real estate in the burgeoning energy export market—the deep water at Cherry Point, Washington.

The county found BP’s arguments that the valuation of their Cherry Point assets should be revised downward to roughly equivalent to what the company’d just invested in improving those assets for future profitability… unpersuasive. But the county was willing to consider that the valuation might be equitably adjusted, particularly when the risk included protracted attorney fees and legal battles fought in front of the mercurial Board of Tax Appeals in Olympia.

“The system goes back to stable, the amounts we plan on receiving becomes stable, the tax administration itself can move forward, and we get to move ahead without the damaging effects of valuation controversy,” Willnauer said. “And in fact the taxing district recovered quite a bit of substantial value that had been removed previously as we responded to the controversy.”